Lower oil prices squeezing U.S. manufacturing sector

Thu Jan 28, 2016 12:18pm EST
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By Lucia Mutikani

WASHINGTON (Reuters) - New orders for long-lasting U.S. manufactured goods in December recorded their biggest drop in 16 months as lower oil prices and a strong dollar pressured factories, the latest indication that economic growth braked sharply at the end of 2015.

Despite the slowdown in growth, which was acknowledged by the Federal Reserve on Wednesday, the labor market remains on solid ground. First-time filings for jobless benefits retreated from a six-month high last week, other data showed on Thursday.

Economists have expressed worries that the energy sector slump and drag from a strong dollar are spilling over to other parts of the economy, which would lead to continued weakness in early 2016.

"U.S. companies are cutting investment sharply, and the key worry is that it seems to be spreading beyond the oil sector and in the meantime consumers are missing in action, not able to offset the huge drag from the energy sector," said Thomas Costerg, a U.S. economist at Standard Chartered Bank in New York.

The Commerce Department said durable goods orders plunged 5.1 percent last month, the biggest drop since August 2014, after slipping 0.5 percent in November. The decline was generally broad-based, with orders for transportation equipment plunging 12.4 percent and bookings for non-defense aircraft plummeting 29.4 percent.

The drop in aircraft orders is surprising as Boeing (BA.N: Quote) received orders for 223 aircraft in December, up from 89 planes the prior month, according to information posted on its website.

Economists had forecast durable goods orders falling only 0.6 percent last month. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell 4.3 percent in December, the largest drop in 10 months. These so-called core capital goods orders fell 1.1 percent in November. The decline in orders for both durable and capital goods adds to weak data on retail sales, industrial production, exports and business inventories, suggesting the economy slowed sharply in the fourth quarter.

Apart from the buoyant dollar and spending cuts by energy firms bruised by the slump in oil prices, the economy has been blindsided by anemic demand overseas and business efforts to trim an inventory overhang. The growth outlook has been dimmed by the recent stock market selloff.   Continued...

A Ford Motor assembly worker works on the frame of a 2015 Ford Mustang vehicle at the Ford Motor Flat Rock Assembly Plant in Flat Rock, Michigan, August 20, 2015.  REUTERS/Rebecca Cook